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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. CPI coming in below expectations, trade us adding to bets for two more rate cuts this year, including one next Wednesday. David Kelly of JP Morgan Assen Management joins us. Now for more, David, let's start with the inflation data. Is three the new two? And is it going to stop this feder reserve from cunning interest rates?
Well, I think the Fed's going to keep on cutting rates. It's generally a better than expected to report. But I think what a really show is we have a K shaped economy, and it's sort of a K shaped CPI report. The thing that really jumped out of me is first of all rental costs coming down. There's you know, we've got a big change in demographics here and rents are rental inflation is just going away. You also saw US
vehicle prices full. I thought that was pretty interesting. And then the big thing here is core goods prices outside of food and energy. That's the stuff that should be hit by tariffs. But that's only up two tens of percent of one and a half percent year over year. It is clear that mainstream retailers don't believe they can pass on the tariff increases right now, and that's what's making this inflation rate a little bit tamer than people feared.
David doesn't's just justify what the market's already sussed out, which is that inflation fears were overblown earlier this year. The Fed can keep cutting and potentially below three percent by the end of next year, and that it's not going to cause a huge inflation problem.
Well, I never thought we had a long term inflation problem. But I think it is still early days on the tariff effects. So what's going to happen is right now retailers feel like they can't pass on the price increases.
But early next year you're going to have this refund bonanza.
The average incompact refund per household, we believe it's going to be able four thousand dollars. Last year is thirty two hundred dollars, and that is the exact time when retailers are going to feel like they can pass on these tariff increases. So I do think we've got a little bit of a spurred in tariff inflation still to come. But then you know, if nothing else happens, there isn't a lot of momentum in this economy, and it'll slow down again, and it'll cool down again. So I don't
think we've got a long term inflation problem. My real question is, given how bubbly financial markets are, do you really need the Federal Reserve adding more liquidity to the party right now? Or should they just hang on in there and say this is enough liquidity?
What are you saying?
What are you seeing that really is bubbly Given the fact that earnings have exceeded expectations, the forecasts have exceeded expectations, and we're likely to see more of the same next week.
With the tech earnings, valuations are extremely high for the over now. Obviously, it's a lot of it's concentrated in the mega cap stocks, but also profits is a share of GDP are extraordinarily high. So overall, the total valuable US market cap is about three hundred and sixty five percent of GDP right now. It was about two hundred and twelve percent before the tech bubble bursts back.
In two thousand.
It was eighty seven percent before the eighty seven stock market crash. So there's all you know, it's leverage upon leverage, high pe ratios on a very high level of earnings relative to GDP. Now, I still think this is a very good economy for equities, but I wouldn't say that you could call the market depressed at this stage. I think that, you know, one of the dangers here is that everybody gets out over their skis and then you have a significant market correction or a bear market.
So are you talking about potentially if the Fed is cutting into strength, they'll be making an error this month.
Yeah, because it's a different economy. And talking about well the Fen's going to tighten to lower inflation, forget about it. The federal reserves, short term ingistrates are not impacting growth, They're not impacting inflation, but they are impacting financial markets. And the big problem that we've had in this century of the two thousands hasn't been CPI inflation getting getting out of hand. It's asset bubbles, you know, whether it's
housing bubbles or tech bubbles. And the Federal Reserve should not be in the business of blowing up bubbles. So I think they should, you know, just take it easy. I don't mind if they cut rates a little bitsier, but I certainly would have a problem if they cut rates below what they think neutral is if the economy is you know, is not threatened by a recession, because we are seeing money go into financial markets, go into
financial assets and just not come out. And it's sort of it's kind of like a stuck valve, and the more money goes in, the more this this market just seems to accelerate upon itself.
And David, if we ask Governor want of this question when he was on the program last week, we asked whether it's getting lolved into kind of interest rates and potentially reducing financial markets. David, do you think there's a problem with their interpretation of the dual mandate or just the your mandate.
I think the dual mandate itself.
I think that I think that if they need, Congress needs to recognize, they need to recognize that monetary policy has significant impacts on financial conditions, and therefore maintaining stable financial.
Conditions should be part of the goal.
It's kind of like with the ECB, who for years decided they didn't they weren't supposed to interview if one particular country got into significant economic distress and destabilize the eurosystem. And then finally Mario drag He said, look, if Greece
is a problem, we're going to do something about Greece. Well, this is a similar situation where the mandate needs to be expanded a little to recognize the impact of FED policy on financial and other asset price bubbles, to try to prevent bubbles or busts, because of course that's what you bubble creates a bus and you want to have financial market stability, not just economic stability, and I think the Federal Reserve can have an impact on that.
Stay with US multile impact surveillance coming up after this, a downside surprise on headline and core CPI unlocking some lower bondiolds this morning. Going into that Federal Reserve decision next Wednesday. Joining us now to discuss is Tiffany wanting of pimcod Tiffany welcome to the program. Is this a source of comfort for this Federal Reserve next week?
Well, I mean, I don't know.
I mean, I think certainly it's good news on the inflationary pressures. But the argument that we've been making, which I think is symptomatic of this report, is that the economic adjustment that we're seeing to tariffs is coming through less on a price adjustment, and instead companies are finding ways to defend margins by offsetting other costs. You know.
I think the fact that you saw another headline this morning around a large retailer, you know that is doing you know, some layoffs at the you know, kind of higher executive levels.
That's just in our minds symptomatic.
Of that that that they are I'm finding these other ways to cut costs. So you know what that means for the Federal Reserve is that there is some downside risk to the labor market here. So I don't I don't know that they should be you know completely, you know, taking a sigh of relief here. We need to see
the labor market data obviously when the government reopens. But as as you and Mike mentioned, we do think they cut in October, you know, and of course the median expectation from the FED is that they'll cut again in December.
How much the forward look can they give us at the October mating, Tiffany, when chem and Pal goes into the news conference, Hey doesn't have much visibility on anything right now. How much guidance can he offer us for December and beyond.
Yeah, I mean, I think it's incredibly tricky, and I'm not sure that they will offer a lot of guidance.
You know.
I think they're going to they're gonna they're going to say that we don't have a lot of data to go on here. There's private sources of data, but even there, it appears that some of the Feds, you know, the previous sources of private data that they got in the labor market, maybe they're not getting anymore. So it is a much more tricky situation for the FED. You know, they're going to be looking at you know, markets and you know, and I think the news flow in order
to kind of figure out what's going on here. And I think it's going to be really tough for him in terms of guiding any further tiffany.
A lot of people have been looking at the housing.
Market in particular as a sign of disinflation going forward, and one thing that Mike pointed to is owner's equivalent rent. Looking at this, it just looks like inflation and owner's equivalent rent has fallen to the lowest pace going back to twenty twenty one, with a pretty big decline, which is one thing that's giving fuel to some of the enthusiasm and pun markets this morning.
I'm just wondering how big of a tell that is for you. Yeah.
No, I mean I think that that the normalization in housing and rents is something that you know, the economics community has expected for some time, and I would argue that it's delayed, and it was delayed because we saw a really big immigration boom over the last couple of years.
Now obviously that the immigration police has taken a big u turn, you're not seeing those tailwinds of you know, additional population coming into the United States needing housing, and as a result of that, you're seeing rens cool off
quite a bit. So I don't think it's that surprising, you know, but I do think it's you know, one of one of the things that should give the Federal Reserve comfort, you know that they you know, the inflationary pressures outside of you know, some terraff related pass through are pretty benign at this point, given.
The fact that we're seeing no inflationary pressures to note that really are even beyond what people expected, and you are getting these announcements you were talking about the target announcements without naming them, laying off about a thousand people and removing eight hundred jobs from their listings. We also
saw GM announcing around of job cuts this morning. I'm just wondering how much these are just anecdotes and typical versus something that really is softening, that is behind the disinflation, as well as the concerns that the Fed has about the labor market.
Yeah, I mean, I mean again, we think it's it's very symptomatic of how we see the economy that's ultimately adjusting to tariffs. You know, I think the really big surprise this year coming in, you know, coming into the year and thinking about tariffs is that you'd get some price level adjustment. And there's multiple ways that companies can
adjust to this. You know, and I think what we're learning is that, you know, they're not fully adjusting prices and that they're trying to offset costs in other ways, you know.
And I think the fact that you're seeing this.
AI investment boom and some broadening out just in the diffusion of AI technology, companies are hoping to get some labor saving cost benefits here and investing in capital because of the tax the new tax law, the One Big Beautiful Bill Act, you know, gives you pretty big you know, tax tax incentives with upfront capital expensing. So I think companies are really just making this adjustment, you know, more so through the labor market and in terms of the
federal reserve, and they're mandate. You know, that just suggests that they have more room to start to uh, you know, to adjust policy back towards neutral. If they do cut two more times this year, they would be uh, you know, three three and a half, which is kind of the upper end of the range of neutral estimates that they have. And so getting back there and making that adjustment, you know, seems very reasonable to us, just given the information that's coming in tifically.
When you say labor saving cost benefits, should we all be expecting more layoffs then to be announced in twenty twenty six.
Well, I mean, I think the the economy will will need to go through an adjustment as a result of you know, these these transitions that we're seeing, whether it be you know, the policy related transitions this year or you know this tech uh you know sort of tech transition that we're seeing. You know, it does seem like
AI is moving pretty quickly, you know. I think it's you know, it's it's still uncertain how how much productivity gains will will actually will actually get and how that will you know, save costs for companies, you know, but I think it we are starting to see the effects of that.
I think you could start to see.
It at announcements layoff announcements as well at some of the tech companies. You know, it is displacing some workers. Now, I think what's harder to understand is, you know, eventually it will also create new jobs.
And how quickly will that happen and what.
Those new jobs will be is more difficult to forecast. But I think at least in the near term you will see some you know, some labor saving you know, displacement here and the companies need that and are forced to try to get it because they have more terar for related costs.
Stay with US mult Bloomberg Surveillance Coming up after this, President Donald Trump and Chinese President Chaing Ping is set to meet on Thursday in South Korea as the world's two lunchest economies looked at East trade sentience. To extend the conversation, George Pollack of Signum joined US. Now for more, George, that's Guy's for the issue rare raths, soybeans, and then we've got the issues around fence and O. Of those three, what's the higher, Rocky, what's the more difficult one to achieve?
I think for the President, the most difficult one to achieve is rare earth because China understands that with rare earths they have the US and a disadvantageous position. And they remember when these tiers were first implemented earlier this year, the car manufacturers came to the president and said, if you don't get the rare earths started, we're going to have to shut down production. And China knows that, and that's where the President's probably going to have to be
most aggressive. But at the same time, understand China has the advantage.
Is China sending any signals that they're prepared to walk back what they plant, what they have been doing when it comes to rare earth.
I think China's understanding of this rare issue is we haven't really done anything, and what we have done was more a response to your restrictions, and all we're doing is setting up a new licensing regiment. Rare earth are going to continue to come out, and you don't have to worry. It's be happy with the status quote. But you decided to change things up and you've decided to overreact and become more pugnacious.
Well, it's not just a new regime when it comes to rare Earth's any material that China exports it has an ounce of a trace of a rare earth needs to get a specific export license, which is why the Europeans are even considering using their anti coercion tool, George. The fact that the Europeans are willing to go to the third rail, a tool they've never used in any negotiation, is that at the moment helping the United States into Thursday's meeting.
I think for the President from Scott Bessen's O viewpoint, it is helping, It is helping the president give him a more global power and a more global idea that this can't go on. But at the same time, China's responded to this as that's great that you're united, but we still have the advantage and we don't understand why you're being so aggressive with us back and why you're deciding to play it so fast and loose.
So what's your case then, for Thursdays, it's just a continuing rolling truth.
Our base case is a continuing rolling truth where the US and China understand the current situation where the presence of threating increased tariffs and the continuing threat that is a new licensing regime kind of rolls back to an extent where we get back to the Geneva London understanding. But that doesn't mean it's a positive situation because we're still going to be having these situations pop up every couple of weeks where either the President is frustrated or China is frustrated.
In the fact, in the past few weeks, it seems like the US has been trying to mend relations with a number of traditional allies and create closer ties, which is the reason why, in the wake of the announced meeting between Jijinpang and President Trump, the new tensions with Canada are interesting.
How do you sort of understand.
That in the bigger sphere of negotiations with.
China in terms of the attentions with Canada. The way we view this is Canada's right now between a rock and a hard place within the Canola tariffs and ev tears they've placed on China, and they need to get that restarted. But at the same time they need to deal with USMCA renegotiation. And we've always thought that USMCA is going to be an aggressive renegotiation from the President and things like transhipment and rules of origin are going
to come into play. And I think for the President, he's making clear to Canada, you're either with US the United States, or are you with China. You can't get both.
This feels like a long game of leverage, and that's sort of been the big question between the US and China.
Who has the leverage, And people argue on both sides.
China having the leverage and rare earth minerals, maybe the US having a bit of an edge when it comes to technology, and just the.
Dynamism in the US economy. I just wonder how much.
You expect there to be some discussion of Russia and oil purchases, how much that's on the table versus just getting there and figuring out how to job own and kind of poke your elbows out, sort of have the same thing that we have right now.
I have no doubt that there's people in the White House who would like to discuss Russia, whould like to discuss oil. But I think the President's made clear hisorities are, among other things, fentanel and soybeans, and I think that's
where his focus is going to be. He is thinking short term right now, and his most likely his biggest short term weakness is the farmers, and is their inability to get assistance during the shutdown, and inability to get assistance because China, what for the first time in seven years in September did not purchase a single soybean.
Can you tell me, George, your day on the calendar was circled when you think the shutdown finishes.
I think we're still taking the place that this ends in November first for US Democrats. Send Democrats understand that at November first, the open care healthcare woman opens up. Republican voters are going to see the other premiums increase, and for Democrats that will be well will be negative for voters. Democrats will be able to say we wanted to fix this, Republicans were the one.
Who said no.
So you're basically saying it ends November first because Democrats will line up for the continuing resolution, not because they struck a deal with Republicans on healthcare.
I think we will have to happen as Senator Schumer will have to walk with a hard line to not go down, but to navigate his caucus and to allow either the retiring members or the more moderate members to vote for it, and then message saying Democrats wanted to
fix your healthcare. Democrats wanted you to avoid these premiums, but Republicans were the one who are saying no. And that will be the I guess the Democratic win will be one making healthcare an issue in the elect In the election, two Democrats being able to take the eighty twenty side of an issue the eighty side of an eighty twenty issue, and Democrats being able to say Republicans are the ones to blame for what is happening with your premiums, and if you want to punish them, the
best way to do that is to vote for us.
Stay with us.
More Bloomberg Surveillance coming up after this, stocks rising, its markets are way. The latest read on inflation, John Stoffers of Oppenheimer writing, our intermediate and longer term outlook for the US economy and the stock market remains decidedly drum roll bullish, John, the most bullish man on the street. Let to see a second month, to see you too. Let's get to somebody these questions regarding inflation. How relevant is this morning CPISA to today's market.
I think as long as it comes in in line or close to inline, I think we'll be fine. If it's a drastic surprise, then of course to higher inflation, not so. And if it's also much lower inflation than people say, we're in trouble. Is the Fed going to do fifty in set of twenty five? So it's any kind of action that can create BIPs for the traders you have to watch for. But we think it'll be it'll come in line with expectations, and we think that we're going to cut tomorrow.
It's important today next week, it shapes perceptions of feder reserve policy for next week and beyond. Does it shape perceptions of money policy for next week and beyond?
You know, I think it's We've said for a long time, we think the Fed is making down payments to Main Street and to Wall Street to give them an idea. Indeed, this this monetary tightening policy period is ending, not ending as quick or as deep in terms of the cuts as both Main Street and Wall Street would like. But sometimes, you know, you can't always get what you want, but you may find you get what you need.
You know, Well, at this point, we're looking at earnings that are coming in better than expected. We're looking at a FED that's going to look past any kind of CPI.
Print and cut rates.
And yet yes, you're bullish at the same time you're talking about going up in quality.
How do you pair those two ideas?
Well?
You know, I think you have to be realistic in that the market has genuinely shown that it's still a little bit nervous about small and midcaps.
You have these days when we go.
Risk off, where they don't go completely risk off in a traditional sense. They're not running out of the market, but all of a sudden, you'll see the smalls in the mids will get a good day, you know, versus the large caps. But when it comes down to it, people are concerned that perhaps the economy is weaker than perceived. We're in this blackout period without without any data flow. So the thought really is, it's you hug the large caps. Also, the large cap stocks appear to be the most resilient
when it comes to earnings. If you look at the earnings reports for the last earning season fourth quarter, first quarter, second quarter, and thus far third quarter, this looks good.
I love a good cliche on a Friday morning. What inning are we in here? Just because that is sort of a question, given that some people were talking about almost recession like conditions earlier this year that have really revived in a sort of reacceleration now into the beginning of next year.
Yeah, I'd say, you know, we've thought for a long time because of the change in the federal reserves policy and the way it acts, how quick it acts, and how communicative it is, that essentially we've for a long period been it's an extended mid cycle. I like to say the economic cycle is as wide as the Amazon and we mean the river.
Okay, because it's been going on for a long time.
How often have you heard from the bears were light cycle that all of a sudden some of the most bearished in the past are saying we're actually coming to early cycle.
And we're going back. But no, I think it's it's a big fat mid cycle.
And it's because between the federal reserve policy that's Ben Bernanki legacy, as well as increased use of technology creating greater efficiencies for both the consumer and business, and experience that's been garnered from all these things, whether it was the financial crisis, COVID coming out of COVID, supply chain, trade wars, all this stuff, it's you know, it's it's better than expected.
And it's resilience. It's not you know, what was the old.
Word they used to host robust. Heck with robust, I will take resilience.
Is what I like.
Well, you in a very long term view.
Short term though there's a lot of policy uncertainty, what gives you the most angst?
And Marie, it's the the well, what gives me the most angst has very little to do a lot of times with the market. It's just that the popularism of socialism and communism, which are failed ideologies, is rising in
different places around the world. But I think related to what keeps me up at night is just I look at valuations, and as long as it's recognized that valuations are probably higher than historical standards would have us at this point, what we're believing is that people are investing more seriously than ever before, at least in the US, because they recognize social security will simply not be the same percentage of income and retirement, and people are worried
that they might live too long. They don't want to lose their living standards, and so people go to equities, which historically have proven to be past performance no guarantee of future results. But it's that equities have shown resilience in dealing with inflation, changes in the economy, changes in tread in trend. It's good to own a good business.
This must be a generational thing. Who do you know the worries about living too long?
Well, you know, but everybody the same thing. Do you know if you want not at all?
If you look at it though, if you look at the another year with the report in terms of investor behavior, it's cross generational, so you still have among the youth, you still have the desire to gamble a in a bull market.
It's the crypto, it's gold or silver.
Way Ama that bus to take resks, don't you?
Oh, and you need that. It's good for liquidity.
But they also are investing seriously on the other side of it because they recognize that this social security. It's not that the politicians are going to eliminate it. That would be like an insurance company default and those people would never get elected ever again to anything. But they recognize it just will not be the same support that it was, the same safety.
I think America gets it. I think it's the Europeans that don't. The state is just not going to be there for them, particular our generation in the coming decades. The state is not going to be there for them in the same way. Do you see the Europeans doing the same thing to invest to participate in capitalism in a secuity market.
I think from a cultural perspective, it's more difficult to move towards that You've begun to see it, just in terms of if you look at elections in Europe, if you look at the way the market is beginning to respond to needs for development of technology to some extent. All of that shows that things are changing, but slower because it has been you know, Europe and the UK have been steeped in socialistic practices that are big government and that's expensive bureaucracy for the services provided.
And there's a move that's beginning to happen.
It's a pendulum that's slow, and politically it's gosh. You have to you have to avoid missing the signal for all the noise on a day to day basis. But the market is telling us this is actually manageable and if anything, the alternative to cooler heads prevailing is much too awful to move towards well.
And this is really the key question.
Are things better than expectations this morning out of Europe or pmis that actually came in better than expected led by Germany Francis its own story. I'm just wondering how much you can get excited there or how much you really are staying focused on the United States based on the underperformance of the dollars so far this year, and based in the fact that you do have the base of people who very much are going to invest in preparation for reduced benefits.
Down the line, I would have to say we're still overweight US, but we say meaningful exposure to both developed international markets as well as emerging markets because there you've got combination of valuation demographics where they are on the timeline of their financial history at an attractive area.
But we would have to.
Say in the US, it's accountability, transparency and governance for all the arguments that we have. We do have all you just see it in all the court action that happens in Washington. You've got people can still work things. There's a potential to work things out. The other thing is the dollar. When I look at it, this is the Bloomberg A Dollar Index, which is my favorite because it includes the emerging markets as well as the ephas.
What you've got is it was up last year.
It was up about seven point nine eight percent, to get too specific, and this year it's down something like somewhere between eight and ten depending what day you look at it.
It's down.
Essentially, it's just giving back after a period of the dollar being so incredibly strong. Because in an uncertain world, when things get really bad, all the world moves towards Poppa, which looks like Uncle Sam.
This is the Bloomberg Savanics podcast, bringing you the best in markets, economics, anchio politics. You can watch the show Life on bloombag TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.